Dubai Inc. Scuttled

There were plenty of indicators that things weren’t right at Dubai Inc. even before the fiasco emerged on Wednesday about Dubai World, the emirate’s sovereign wealth holding company. For example, in February 2009 it was reported in the Times UK that expatriates were “abandoning their cars at the airport and fleeing home rather than risk jail for defaulting on loans.” The same forces that were making their way through the capitals of high finance and choking credit were emptying out the professional classes of Dubai Inc’s most notable businesses.

Throughout the past decade, Westerners invested in Dubai’s ever more grandiose aspirations by saddling themselves with overpriced homes, that in many cases were never built, in the hope that they could prosper through perpetual ‘flipping.’ However, as the great recession spread across the globe, property values in Dubai plummeted and construction work was either delayed or outright cancelled. Businesses went unpaid, many lost substantial amounts in real estate speculation, and the economy contracted. The heady days of unrestrained double-digit growth had come to an end, and while Westerners could scurry to safer ports, the Arab rulers of this city-state could not as easily pass the bill onto others. The great de-leveraging that had begun a year earlier and had forced economic re-alignments everywhere, was upon the emirates.

With Wednesday's announcement, Dubai World effectively declared itself insolvent. “People are panicking: this whole process counters everything that the rulers [of Dubai] have been saying and the way it has been communicated before the holidays is confusing,” said one hedge fund manager. International investors across the globe reacted with equal outrage at Dubai World's announcement. Markets declined sharply, with commodities such as gold and oil falling and investors moving to safer investments.

Overall, Dubai World and its real estate arm Nakheel, is shouldering some $60bn (£36.5bn) in debt and was due to repay around $4bn next month. Abu Dhabi, with its oil-rich cash reserves had been touted by both the ruling family of Dubai and investors alike as the most obvious source of assistance. However, it is also widely understood that Abu Dhabi has grown annoyed and frustrated at Dubai's profligacy and was not willing to simply hand over money carte-blanc. Business Week states,

It's been obvious for some time that the emirate owes more money than it can repay. But what remained unclear was the overall extent of the debt load and what officials were doing to avert a panic at a time when the world was in the nascent stages of emerging from its worst recession in over six decades.

Although the amount is not significant in global terms, it presents the undesirable possibility that many other countries (i.e. Greece, Latvia, Hungary…etc) and issues that have been hidden, such as in the case of China, may likewise follow. Arnab Das, of Roubini Global Economics, provides a moderate's assessment of the current circumstances in Bloomberg,

The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear. We still have to work out those balance sheet stresses. The recovery is proceeding, but significant challenges still lie ahead.